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Chapter 3

Investment appraisal – Discounted cash

flow techniques

Outcome

By the end of this session you should be able to:

 explain the concept of the time value of money
 calculate the future value of a sum by compounding

 calculate the present value (PV) of a single sum or of an annuity using a
formula and discount tables and of a perpetuity using a formula

 calculate the PV of advanced and delayed annuities and perpetuities

 explain the basic principles behind the concept of a cost of capital

 calculate the net present value (NPV) of an investment and use it to appraise
the proposal

 discuss the usefulness of NPV as a discounted cash flow (DCF) investment
appraisal method and its superiority over non-discounted cash flow methods

 calculate the internal rate of return (IRR) of an investment and use it to appraise
the proposal

 discuss the usefulness of IRR as a DCF investment appraisal method and its
superiority over non-DCF methods

 discuss the relative merits of NPV and IRR

and answer questions relating to these areas.

The underpinning detail for this Chapter in your Integrated Workbook can
be found in Chapter 3 of your Study Text

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